Court allows preclusion of counterclaim when pure defense meets threshold but counterclaim does not.

THE COURT OF APPEAL

CIVIL

Finlay Geoghegan J.

Peart J.

Irvine J.

Appeal No. 2015/172

NATIONAL ASSET LOAN MANAGEMENT LIMITED

PLAINTIFF/RESPONDENT

AND

GARRETT KELLEHER

DEFENDANT/APPELLANT

JUDGMENT delivered on the 15th day of April 2016 by Ms. Justice Finlay Geoghegan

1. This appeal raises an important point of procedure which does not appear previously to have been the subject of a written

judgment. Further it is agreed between the parties that the point was not expressly adverted to in submission to the trial judge

before judgment.

2. The point is as follows. Where, on an application by a plaintiff for summary judgment the defendant seeks leave to defend upon

two grounds: (i) a pure defence and (ii) a defence by way of set off of a counterclaim for damages and the judge determines that the

pure defence meets the arguable threshold, but the defence in reliance on the counterclaim does not, has the court in remitting the

matter to plenary hearing with leave to defend upon the pure defence jurisdiction to preclude the defendant raising the counterclaim

and if so, what are the criteria according to which such a decision should be made.

3. The issue arises in this appeal, upon the following facts. The plaintiff issued a summary summons seeking judgment for

€46,834,472.35 pursuant to guarantees given by the defendant originally to Irish Bank Resolution Corporation Limited of facilities

advanced to companies of which the defendant was the ultimate beneficiary.

4. The plaintiff brought a motion seeking entry to the Commercial List and summary judgment against the defendant in the usual way.

The proceedings were entered in the Commercial List and a significant number of affidavits were exchanged on the application for

summary judgment.

5. The defendant does not dispute the guarantees entered into nor the amounts owing on the guaranteed facilities. He asserted two

defences to the claim against him:

(i) the plaintiff is estopped from enforcing the guarantees by reason of representations made that if the defendant

cooperated with the plaintiff, which he maintains he did, that it would not enforce the guarantees. This defence was

referred to as the estoppel defence.

(ii) the defendant as the ultimate beneficiary of companies collectively referred to by the plaintiff as the “Shelbourne

Connection” has a counterclaim against the plaintiff for damages by reason of certain actions of the plaintiff which

diminished the value of assets held by companies within the Shelbourne Connection such that the companies were unable

to discharge the amounts due on the facilities and also the defendant as ultimate beneficiary is unable to discharge the

amounts due under the guarantees. Alternatively it was contended that the amount of the damages recoverable on the

counterclaim exceeded the value of the claim against which it might be set off.

High Court hearing and judgment

6. The summary judgment application was heard over two days in the High Court by Fullam J. upon significant affidavit evidence and

exhibits. It was not in dispute that the defences sought to be raised had to meet the threshold of arguability or a bona fide defence

in accordance with cases such as Aer Rianta v. Ryanair [2001] 4 I.R. 607.

7. Fullam J. delivered a written judgment on the 24th February, 2015, in which he identified the two defences raised and having

analysed the estoppel defence, concluded that the defendant had an arguable defence on that ground. That finding was not in

dispute before this Court.

8. The position in relation to the second ground of defence in reliance upon the counterclaim relating to the Chicago Spire is more

complex.

9. The trial judge at paras. 42 and 43 of his judgment set out the defence being advanced and his initial analysis of same in the

following terms.

“42. The defendant’s case is that the plaintiff recklessly sold the Spire loan at a gross undervalue for a price of $35 million

when the face value of the loan was in excess of $90 million. He says that had the matter been handled properly the site

would have realised the sum of $350 million which would have enabled him to clear his indebtedness in respect of the

Spire loan and also his liabilities under the Cratloe and Modillion guarantees. Instead, as a result of the sale of the Spire

loan in June, 2013, he has been deprived of the opportunity to clear his indebtedness under the Spire loan and the Cratloe

and Modillion guarantees.

43. The effect of the plaintiff’s contention is that he has a counterclaim for damages which is more than sufficient to

offset against any liability under the guarantees in these proceedings. To succeed with such a counterclaim, the

defendant acknowledges that he has to establish that ss.10, 11 and 12 of the Act of 2009 impose obligations on NAMA

which are more onerous than the normal duties of a mortgagee as set out in Silven Properties Limited v. RBS plc [2004] 1

WLR 997 and approved by the Supreme Court (sic) in Dellway.”

It was common case on appeal that the trial judge intended to refer to the High Court judgment of the Divisional Court in Dellway

Investments Limited v. NAMA [2011] 4 I.R. 1 and in particular pp. 76 to 77 rather than the Supreme Court. Nothing turns on this.

10. The trial judge appears to have treated the second defence as one dependent on a counterclaim. He first considered the

counterclaim asserted in reliance upon ss. 10, 11 and 12 of the National Assets Management Agency Act 2009 and at para. 49 of his

judgment stated:-

“In my view, these provisions do not impose additional duties on NAMA towards debtors, guarantors or mortgagors over

and above the duties of an ordinary mortgagee in respect of the management and realisation of bank assets.”

11. A question has arisen as to whether in the light of the above conclusion that issue is or is not to be considered res judicata

between the plaintiff and the defendant herein. This was referred to rather than argued before this Court and it is not necessary to

express any view on it for the purposes of the appeal. I only wish to indicate that for the purposes of deciding the appeal I am

treating the decision of the trial judge as being that the defendant did not reach the Aer Rianta threshold of arguability on the issue

as to whether ss.10, 11 and 12 of the Act of 2009 impose obligations on NAMA (or the plaintiff) which are more onerous than the

normal duties of a mortgagee as set out in Silven Properties Limited.

12. Notwithstanding his conclusion on the 2009 Act, the trial judge then continued to consider the affidavit evidence in relation to the

alleged sale of the Spire loan at an undervalue. Having done so at para. 56 of his judgment, he concluded:-

“. . . It is clear from the evidence that, even if the Court accepted the defendant’s submission, that the Act imposed

additional obligations on the plaintiff, the sale of the Spire loan in June, 2013 could not have generated sufficient monies

to enable the defendant clear his indebtedness arising from the guarantees subject of these proceedings.

In the circumstances, there is no reality in this defence.”

13. The final conclusion of the trial judge was:-

“57. Using the test prescribed by Hardiman J. in Aer Rianta v. Ryanair Ltd. [2001] 4 I.R. 607:

‘Is it very clear the defendant has no case?”

58. I answer that in the negative in respect of the estoppel defence and in the affirmative in respect of the counter claim

for damage to assets.

I will remit the case for plenary hearing on the first issue, namely that of estoppel.”

14. The defendant on the 25th March, 2015, sought clarification, from the trial judge as to his entitlement to pursue in the plenary

proceeding the counterclaim seeking damages for the alleged wrongful actions of the plaintiff. Counsel on his behalf informed this

Court, as is apparent from the transcript of a hearing before the trial judge of the 25th March, 2015, that clarification was sought

because they did not want to appear to be going behind his judgment on the summary judgment application in pleading a

counterclaim. The submission made on behalf of the defendant was that the counterclaim was a claim which he was entitled to

pursue pursuant to his constitutional right of access to the courts and that he could pursue it by a separate writ issued but wished to

do so by way of counterclaim in the proceedings remitted for plenary hearing. On behalf of the plaintiff it was contended that the

second defence advanced was always dependent on the counterclaim; hence even if the defendant were now permitted to pursue

the counterclaim the plaintiff would be pleading that it was res judicata. The plaintiff further submitted that the only live issue

permitted to remain in the proceedings was the defence of estoppel.

15. The trial judge agreed with the latter submission of counsel for the plaintiff that “on the basis of the judgment given on the 24th

February, the only matter that can be pleaded either in defence or by way of counterclaim . . . is the question of estoppel”.

16. It appears that following that hearing on the 25th March, the order of the 24th February, 2015, was perfected and provides:-

“It is ordered that this action insofar as the point of estoppel is concerned do stand adjourned for plenary hearing as if

these proceedings had been commenced by plenary summons.”

Appeal

17. The defendant in the notice of appeal and in the written submissions contended that the High Court does not have jurisdiction to

limit the defences which may be raised by a defendant once the court has made an order remitting the entire of the claim to plenary

hearing. He did so primarily in reliance upon a judgment of Charleton J. in the High Court in Galvin v. Souter Enterprises Limited [2010]

IEHC 215, in which at para. 19, he stated that he was “not entitled to confine the defendants to particular defences”. Nevertheless in

doing so Counsel for the defendant recognised that a different view had been taken by Clarke J. in the High Court in G.E. Capital

Woodchester Limited v. Aktiv Kapital, Asset Investment Limited and Aktiv Kapital ASA [2009] IEHC 512 and by me in the High Court in

Bussoleno Limited v. Kelly [2011] IEHC 220; [2012] 1 ILRM 81 and by Cooke J. in IBRC v. Halpin [2013] IEHC 492.

18. The point, whilst not pressed was not abandoned at the oral hearing and I have therefore reconsidered the issue having regard in

particular to the view expressed by Charleton J. in Galvin v. Souter Enterprises which I think may not have been drawn to my

attention when I decided Busoleno Limited v. Kelly [2011] IEHC 220; [2012] 1 ILRM 81, in the High Court.

19. Having reconsidered the matter I remain of the view that where on an application for summary judgment the court decides that

the defendant has raised an arguable defence to the entire claim such that the court decides to adjourn the full claim for plenary

hearing the court may also limit the defences which may be pleaded to those which have met the threshold identified by the Supreme

Court in Aer Rianta v. Ryanair and the judgments referred to therein. This conclusion stems from the nature of summary proceedings

and the provisions of O. 37, of the Rules of the Superior Courts.

20. The summary summons procedure, in general, may be used where a plaintiff seeks to recover a debt or liquidated demand. As

stated by Lavery J. in Prendergast v. Biddle (Unreported, Supreme Court, 31st July, 1957) the procedure “is provided in order to

enable speedy justice to be done in particular cases where there is either no issue to be tried or the issues involved are simple and

capable of being easily determined”. Peart J. more recently has explained the procedure in Motor Insurers Bureau of Ireland v. Hanley

[2006] IEHC 405, [2007] 2 I.R. 591, as being one which provides “a simple, informal, expeditious and inexpensive method of obtaining

a final judgment”. Whilst the procedure in Order 37 and case law relating thereto provides for such speedy justice or expeditious

method of obtaining a final judgment in those cases where there is no issue to be tried, they also set out a procedure which permits a

plenary hearing in relation at least to certain issues where a defendant, in the initial procedure raises a bona fide or arguable defence

to part or all of the claim. The motion for liberty to enter final judgment or for summary judgment is the filter mechanism through

which such balance is achieved.

21. Order 37, r. 1, requires the motion for summary judgment to be supported by “an affidavit sworn by the plaintiff or by another

person who can swear positively to the facts showing that the plaintiff is entitled to the relief claimed and stating that in the belief of

the deponent there is no defence to the action”. A defendant who wishes to show cause against such motion is required to do so

pursuant to rule 3 by affidavit and such affidavit must state “whether the defence alleged goes to the whole or part only, and (if so)

to what part, of the plaintiffs claim”.

22. Order 37, r. 7 and 10, are most relevant to the Court’s general jurisdiction on hearing the motion for summary judgment. These

provide:

“7. Upon the hearing of any such motion by the Court, the Court may give judgement for the relief to which the plaintiff

may appear to be entitled or may dismiss the action or may adjourn the case for plenary hearing as if the proceedings had

been originated by plenary summons, with such directions as to pleadings or discovery or settlement of issues or

otherwise as may be appropriate, and generally may make such order for determination of the questions in issue in the

action as may seem just.

...

10. Leave to defend may be given unconditionally or subject to such terms as to give security, or time and mode of trial

or otherwise as the Court may think fit.”

23. Rule 8 makes express provision for the granting of judgment for part of a claim and permitting a defendant to defend only as to

the residue of the plaintiff’s claim. Rule 9 expressly permits judgment to be given against one defendant only and to remit a claim

against other defendants who set up a good defence. Notwithstanding that rules 8 and 9 make express provision for those two

situations it appears to me that the general jurisdiction given to the Court to give directions under rule 7 and under rule 10 to grant

leave to defend “subject to such terms as to . . . or otherwise as the court may think fit” gives the Court discretion to grant leave to

defend subject to terms which provide for a fair and efficient hearing for all parties of the issues in dispute having regard to the claim

in the summary summons and any bona fide defence raised by the affidavits. Such an approach is in the interests of the good and fair

administration of justice. Where a defendant in the affidavit sworn pursuant to O. 37, r. 3, purports to “show cause” in the sense to

indicating the availability of two or more arguable or bona fide defences and upon the hearing of the motion the Court decides that

only one defence is arguable or bona fide, then it is consistent with Order 37 and the filter procedure envisaged for claims permitted

to be commenced by summary summons and the fair, efficient and cost effective administration of justice that the Court may impose

terms restricting the defence to that which meets the bona fide or arguable threshold. They are the issues which have been

determined to be in dispute in the proceedings and which require a plenary hearing. To conclude otherwise would undermine the

balance sought to be achieved by the procedure of Order 37.

24. Accordingly, in my view the trial judge herein was entitled on adjourning the plaintiff’s claim to plenary hearing to impose a term as

a condition of the leave to defend, that the defendant might only plead the defence which he decided met the bona fide threshold.

25. The further question is where, as in this instance, leave to defend in relation to one defence which is a pure defence is granted

but a second defence in reliance upon an alleged entitlement to set off a counterclaim is not considered to meet the bona fide

threshold may the Court not only preclude the second defence being pleaded but also impose a term precluding the defendant from

raising the counterclaim as a pure counterclaim?

26. Counsel for the defendant submitted that even if the Court on hearing the motion for summary judgment may in remitting a

summary claim for plenary hearing restrict the defences to a single defence it had no jurisdiction to preclude the bringing of the

counterclaim by the defendant. He submits that pursuant to Order 37 the plaintiff’s claim has now been remitted for plenary hearing

“as if it had been commenced by plenary summons”. Accordingly, he contends that the defendant may pursuant to O. 19, r. 2, plead

with his defence a counterclaim. O. 19, r. 2 provides:

“A defendant in an action may set-off, or set up by way of counterclaim against the claims of the plaintiff, any right or

claim, whether such set-off or counterclaim sound in damages or not, and such set-off or counterclaim shall have the

same effect as a cross action, so as to enable the Court to pronounce a final judgement in the same action, both on the

original and on the cross claim. But the Court may, on the application of the plaintiff before trial, if in the opinion of the

Court such set-off or counterclaim cannot be conveniently disposed of in the pending action, or ought not to be allowed,

refuse permission to the defendant to avail himself thereof.”

27. Counsel for the defendant acknowledges that the Court would have jurisdiction pursuant to O. 10, r. 2, to preclude the pursuit of

the counterclaim in the present proceedings but submits that any such decision would have to be made subsequent to the delivery of

the counterclaim and different considerations apply. Further he recognises that an application could be made by the plaintiff to strike

out the counterclaim on the grounds that it discloses no reasonable cause of action pursuant to O. 19, r. 28 or the inherent

jurisdiction of the court, but again it is submitted that different principles apply.

28. The real question appears to me to be whether the jurisdiction given to the court upon the hearing of an application for summary

judgment pursuant to O. 37, r. 10 is sufficiently wide to permit it to make an order, as a condition of leave to defend, precluding a

defendant setting up a counterclaim. My conclusion is that the court does have such a jurisdiction.

29. Order 19, sets out the rules which apply, in general, to pleadings. Order 37 applies specifically to summary proceedings. Further,

O. 37, r. 7, whilst providing that the court may adjourn the case for plenary hearing “as if the proceedings had been originated by

plenary summons” also expressly gives the court jurisdiction to make “such directions as to pleadings . . . as may be appropriate” and

also more generally to make “such order for determination of the questions in issue in the action as may seem just”.

30. In my judgment O. 37, rules 7 and 10, together give the Court a wide discretion to make orders in relation to pleadings including

orders which both restrict defences which may be raised and also restrict the pursuit of a counterclaim where this appears

appropriate for the fair determination of the plaintiff's claim having regard to the real or bona fide issues in dispute as determined by

the claim in the summons and the decision made by the court at the time of the motion for summary judgment on the affidavit

evidence in relation to the claim and any defence and counterclaim sought to be advanced by the defendant. In particular, where as

in this instance the defendant has sought to advance a defence which is dependent upon an asserted entitlement to set off of a

counterclaim and on the motion for summary judgment the High Court judge has determined that the substance of the counterclaim

does not meet the Aer Rianta threshold then the Court has jurisdiction and is properly entitled to conclude that the plaintiff is entitled

to have its claim against the defendant determined in proceedings where the only issues in the proceedings should be those which are

required to be determined by reason of a bona fide defence which has met the requisite Aer Rianta threshold. Such an approach is

consistent with the general powers given to the court pursuant to O. 37, r. 7 and 10 which appear aimed at ensuring that a claim

which is of a type which may be brought by summary summons proceeds to final determination in an efficient and cost effective

manner whilst having regard to the right of a defendant to pursue in a full plenary hearing either a defence which meets the bona fide

threshold or in certain circumstances a counterclaim which also meets the same threshold both as to its substance and as to its

entitlement to be set off against the plaintiff's claim.

31. The Court was referred to applicable principles set out by Clarke J. in the High Court in Moohan v. S. & R. Motors (Donegal)

Limited [2007] IEHC 435, [2008] 3 I.R. 650 at p.656 where on an application for summary judgment the single defence advanced is

one to set off a counterclaim or cross claim. Whilst those principles do not determine the questions at issue on this appeal

nevertheless the judgment is of assistance. It indicates, I would respectfully say correctly, that when as in these proceedings a

defendant contends for a bona fide defence which is to set off a counterclaim or cross claim there are two separate questions which

the court must address in considering whether the defence meets the Aer Rianta threshold. A court must consider both whether the

connection between the plaintiff’s claim and the counterclaim or cross claim of the defendant is such as to establish a prima facie

entitlement of the defendant to set off in equity the amount recoverable on the counterclaim and also whether or not the substance

of the counterclaim itself reaches the arguable or bona fide threshold. Both questions must be answered in favour of the defendant to

establish a bona fide defence. Unless the counterclaim or cross claim itself meets the Aer Rianta threshold irrespective of the position

in relation to set off it cannot constitute a prima facie defence.

32. In his judgment Fullam J. considered the substance of the counterclaim and concluded (at minimum) that it did not meet the Aer

Rianta or bona fide threshold. In those circumstances it was unnecessary for him to consider in any detail the entitlement to set off

any amount which might be recoverable pursuant to the alleged counterclaim.

33. The parties accept that they did not make submissions to the trial judge as to the consequences of his finding that the estoppel

defence met the Aer Rianta threshold, but concluding that the defence reliant upon the counterclaim did not. Obviously, it would have

been preferable that the parties had considered and made submissions on such an outcome at the first hearing. If that had been done

the trial judge would have had the opportunity of considering explicitly what is undoubtedly a separate and distinct question as to

whether in addition to restricting the defences to the single estoppel defence he should also make an order precluding the defendant

from making any counterclaim in the proceedings and in particular the counterclaim which he had rejected as meeting the Aer Rianta

threshold.

34. The parties indicated to this Court, that if it found that there was jurisdiction to make an order pursuant to O. 37, preventing the

defendant raising a counterclaim in the proceedings, that the question of whether such a restriction should be imposed on the facts

herein should not be remitted to the High Court but that this Court should now determine the issue on this appeal.

35. In summary the defendant submits that the facts upon which he proposes relying for the estoppel defence includes facts relating

to the sale of the Chicago Spire loan and that there is therefore a significant potential overlap between the factual basis of the

defence he is permitted to pursue and the counterclaim in respect of which he submits he has a constitutional right of access to the

courts and which he could now pursue in separate proceedings. The plaintiff disputes this and refers not only to the issues raised by

the 2009 Act and the position of the plaintiff but also to further objections it made in the High court to the counterclaim being sought

to be advanced by the defendant. These include that the assets which it is alleged were diminished in value are not assets personally

owned by the defendant but by companies which are separate legal persons and in whom any such alleged claim vests.

36. In my judgment, the counterclaim which the defendant seeks to pursue raises a significant number of issues both legal and factual

which do not arise on the estoppel defence as pleaded and the Reply delivered thereto. It appears probable that if the defendant

were permitted to pursue the counterclaim in the proceedings it would greatly increase the issues, both legal and factual and hence

increase the costs and time required to hear and decide the proceedings. In circumstances where the trial judge concluded, at

minimum, that the substance of the counterclaim did not meet the Aer Rianta threshold and having regard to the nature of the

counterclaim and the nature of the plaintiff's claim and the fact neither the guarantees nor the amounts are in dispute I have

concluded that it is in the interest of justice that the plaintiff's claim be determined in proceedings where the only issues which may

be pursued are those pursuant to the estoppel defence which is considered to have met the Aer Rianta threshold.

37. Accordingly, I would dismiss the appeal.